LEASE LANGUAGE

Continuous Operations Clauses A reported legal decision I recently read on the issue of the existence of an operating covenant in a shopping center lease reinforces the importance of the use ofparticular "lease language" in order to create certain obligations under a lease. In the following case, the failure to include words requiring continuous operation led the court to refuse to enforce an operating covenant.

In Hamilton West Development Ltd. vs. Hills Stores Company, 959 F. Supp. 434 (1997), Hills, a discount department store, was the sole anchor representing about 45% of the total square footage of Hamilton West Center in Ohio. Hills elected to close its store in the shopping center, and the landlord sought to enjoin the closure, alleging that the closure violated the continuous operations covenant of the lease. The leases of two other tenants in the shopping center contained co-tenancy clauses, giving those tenants the right to terminate their leases if Hills ceased operating. The landlord claimed it would suffer significant harm if Hills was permitted to cease operations.

The Hills lease contained this clause (which I have edited to delete provisions not pertinent to this discussion): "Tenant agrees to use the Demised Premises as a department store ... (and for no other purpose) and to operate its business in the Demised Premises under the name of Hills ... on all regular business days except legal holidays, at least eight (8) hours each day between 9 a.m. and 10 p.m. Tenant retains the right, in its discretion, to be open on Sundays or holidays ...." The lease gave the landlord the right to terminate the lease "should Tenant at any time elect to discontinue the operation of its store ...."

The landlord argued that this provision was a covenant on the part of the tenant to continuously operate its store in the shopping center during the term of the lease. Hills, obviously, contended to the contrary.

The Court's Decision Because of the dispute over interpretation of language in the lease, the court looked to evidence extrinsic to the lease itself to find the intention of the parties. The business representatives of both tenant and landlord testified at trial that they did not recall discussing a continuous operations requirement. Letters exchanged by the parties as to the business deal did not refer to an obligation by the tenant to continuously operate. The lease was drafted on the tenant's form, and the landlord's counsel commented on it. The court specifically noted that in a memo drafted by a representative of Hills regarding the comments of the landlord's counsel to the lease, nowhere were the words "continuous operations" mentioned.

In its analysis, the court noted that although many courts have specifically refused to enforce continuous operations clauses, even when they are expressly stated, the court believed that in Ohio the courts would enforce such a covenant if the intent was clear. The court held that in this case, however, the language did not clearly evidence an intent to require continuous operations.

What This Means To You This case highlights the distinction between an "hours" clause and a "continuous operations" clause. The lease clause in the Hills case set forth the required use, trade name and hours of operation, but did not expressly require continuous operations.

The court, in a footnote, gave this example of an express continuous operations clause, saying that "only language that is virtually this explicit should be deemed sufficient to create an express obligation to operate throughout the lease term:"

"Tenant covenants that the premises shall be opened for business, kept opened for business and used by Tenant and any assignee, subtenant or occupant, continuously during the term of this Lease ...."

Thus, where the landlord intends to bind the tenant to an obligation to keep the tenants business open and operating throughout the term, the lease should expressly state an obligation to continuously operate the premises -- and not just state the required hours of operations.

As a side note, the court in the Hills case also determined that it could not find an implied operating covenant under the circumstances. Besides the lack of discussions of any requirement for continuous operations as mentioned above, the court also noted that the use clause referred only to the manner of the use, not its duration; the base rent for the premises was substantial (in contrast to a lease where there is great reliance on percentage rent); and the parties' sophistication and experience would lead the court to believe that if they really intended to hold the tenant to continuous operations, they would have done so explicitly.